How Oil Majors Adapted to Lower Prices and Beat Earnings Expectations

Royal Dutch/Shell and BP on Tuesday joined peers in reporting higher than expected earnings by making further deep cuts in spending to cope with an oil price downturn now in its third year.

Shell’s stocks rose by over 3% as it announced higher quarterly earnings than arch-rival U.S. Exxon Mobil, the world’s largest listed company by output. Anglo-Dutch Shell is hoping to outgrow Exxon over the next few years after acquiring rival BG for $54 billion earlier this year.

By contrast, BP’s stock fell by 3% as some analysts said its results were boosted by a one-off tax gain, meaning its longer-term profits and ability to pay dividends could still be at risk.

Shell’s Chief Executive Officer Ben van Beurden said the oil sector had yet to emerge from troubled waters, but huge cost savings meant oil majors were getting closer to balancing their operations at today’s oil prices of around $50 a barrel.

The prospects for an oil price recovery are still unclear, van Beurden said, despite attempts by OPEC and other producers to agree a deal to limit output and reduce the global glut which has pushed oil prices down by 50% since June 2014.

“Lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain,” van Beurden said.

The world’s top oil and gas companies, including Exxon and Chevron, reported sharp drops in quarterly results last week due to lower oil prices and weaker refining margins.

But at the same time, companies have adapted to the new environment with both Exxon and Chevron beating earnings expectations.

French oil major Total tot also beat third quarter income expectations helped by cost cuts, new projects and renewables and only smaller rivals Norway’s Statoil and Italy’s ENI missed expectations due to lower-than-expected output.

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BP Chief Financial Officer Brian Gilvary said the British company was on track to rebalance cash flows next year at $50 to $55 a barrel.

BP reported a near halving in third-quarter earnings and slashed another $1 billion from its 2016 investment plan, while Shell saw an 18% rise in profits and lowered next year’s capital spending to the bottom of the expected range.

The Anglo-Dutch oil major, whose acquisition of BG Group transformed it into the world’s top liquefied natural gas producer, has been under pressure from shareholders to cut annual spending to ensure it can maintain its dividend given the slow recovery in the oil prices.

Shell disappointed the market with its second-quarter results, the first full quarter following the completion of the BG acquisition in February, by missing expectations by around 50%.

At $2.8 billion in the third quarter, Shell’s net income was above Exxon’s third quarter net income of $2.65 billion.

Oil companies have slashed spending, scrapped new projects, slashed tens of thousands of jobs, renegotiated supply contracts and increased borrowing in order to weather the more than halving of oil prices since June 2014.

“Drilling down to the key fundamentals, oil producers have to cut costs to survive in a lower-for-longer price environment,” said Neil Wilson, analyst at ETX Capital.

Exxon warned last Friday it may need to slash proved oil and gas reserves on its books by nearly 20%, or some 4.6 billion barrels, if oil prices stay low for the rest of 2016.

BP benefited from UK fiscal regime changes, resulting an a $164 million tax credit in the third quarter, compared with a $1.16 billion tax bill in the same quarter last year.

“Despite mixed numbers and a modest increase in gearing, the overall trend in cost and capex savings and cash flows at BP continues to head in the right direction,” analysts from Morgan Stanley said in a note.

1 billion, although this was down from $2.6 billion a year ago.

RBC Capital Markets analyst Biraj Borkhataria said there was “room for Shell to outperform its peers in the near term” following the solid results.

BP on Tuesday also beat earnings expectations, trimming its 2016 capital spending by another $1 billion.

Other rivals, including Exxon Mobil xom and Chevron cvx, reported sharply lower in quarterly results last week due to lower oil prices and weaker refining margins.

Dozens Arrested in Washington State Environmental Protest

Dozens of people were arrested in Washington state on Sunday, two days after protesters set up a blockade on railroad tracks leading to a pair of oil refineries as part of a global protest over dependence on fossil fuels, authorities said.

The protesters, camping out on BNSF Railway BNI tracks at Anacortes, Washington, about 70 miles (113 km) north of Seattle, refused police orders to disperse, said Katie McCulloch, a spokesman for the Skagit County Department of Emergency Management.

All of the 52 protesters under arrest were charged with trespassing, while one person was also charged with resisting arrest, according a statement on the department’s website. No injuries were reported.

Billed as Break Free 2016, the protests on six continents are part of a 12-day campaign to call attention to climate change and to demand a transition to clean energy, according to the organization’s website.

“Break Free is about pressuring the system so we get the change we need, but it’s also about imagining an alternative,” said Ahmed Gaya, an organizer for Break Free Pacific Northwest.

About 150 people began demonstrating on Friday night in Anacortes on tracks leading to Tesoro TSO and Royal Dutch Shell RDS.A refineries. Tesoro spokeswoman Destin Singleton said operations at the refinery were not affected.

Some protesters remained in the area after the arrests, though not on the tracks, McCulloch said. Some were in kayaks and in canoes on nearby waterways, she said.

In Albany, New York, about 1,500 people gathered on Saturday to protest against trains carrying crude oil into the Port of Albany, said Aly Johnson-Kurts, a spokeswoman for Break Free Albany.

The Break Free website on Sunday said the Albany protest was completed but that protests were underway in Chicago near an oil refinery and in Washington D.C., where the group is asking President Barack Obama to stop offshore oil drilling in the Arctic, the Atlantic Ocean and the Gulf of Mexico.

Argentina Agrees $217 Million In Energy Company Arbitration Deal

Argentina has agreed to pay $217 million to two energy companies in long-standing arbitration cases stemming from its 2001/02 economic crisis, part of the center-right government’s efforts to lure back foreign investors.

The country will pay damages to Britain’s BG Group, now owned by Royal Dutch Shell RDS.A, and U.S. firm El Paso Energy EP-C, now owned by Kinder Morgan, the Argentine finance ministry said in a statement late on Friday.

“Both agreements put an end to the claims and level the way to re-establishing direct investments, particularly from companies coming from the associated countries (Britain and the United States) and in the energy sector,” the ministry said.

The World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) had found in favor of both companies in 2014.

Last month, Argentina returned to global debt markets and paid off ‘holdout’ creditors, 14 years after a massive sovereign debt default that triggered an exit of investors and a wave of litigation.

New business-friendly President Mauricio Macri hopes closing that painful chapter in the country’s history will bring down borrowing costs across Latin America’s third-largest economy and attract the investment needed to kick-start growth.

The government is keen to move towards energy self-suffiency and Macri has promised to increase investment in the oil sector, particularly in renewable energy and the sprawling Vaca Muerta shale formation in Patagonia.

The payment will be via dollar-denominated bonds, the government said.

Royal Dutch Shell Has Spilled 88,200 Gallons of Oil Into the Gulf of Mexico

Roughly six years after the disastrous oil spill by British Petroleum in the Gulf of Mexico, another oil giant, Royal Dutch Shell, is reportedly responsible for spilling 88,200 gallons of crude off the coast of Louisiana.

On Thursday, Shell reported that a “sheen” had been spotted surrounding its Glider Field, a group of four subsea oil wells roughly 90 miles south of Timbalier Island, La. The U.S. Coast Guard responded to the offshore spill that day, and reported that about 2,100 barrels of crude are believed to have been released from the Shell subsea well-head flow line, which leads to the company’s Brutus platform.

The company has since shut down the platform.

“The source of the discharge was reported as secured,” the Coast Guard wrote in a statement. “The cause of the incident is under investigation.”

The Netherlands-based company reported on Friday it had sent four boats and an aircraft so far in response to the spill, according to the Wall Street Journal.

Shell is investigating what caused the spill.

“There are no injuries reported and no personnel have been evacuated,” the Bureau of Safety and Environmental Enforcement reported.

Despite its overlapping location, the spill is of a significantly smaller scale than the Deepwater Horizon spill of 2010. BP is estimated to have spilled 4.9 million barrels of oil into the Gulf of Mexico, after a sea-floor oil gusher could not be stopped for 87 days. The spill also killed 11 people.

In celebration of Earth Day, Shell revealed its Project M concept car on Friday. The car boasts an array of laudable features—it can be recycled at the end of its life, and its tweaked gasoline engine, small size, and “bespoke” lubes help it achieve a claimed 107 mpg fuel efficiency, when it stays at a steady 45 miles an hour. Shell says that over its life cycle, the car would use 34% less energy than a typical vehicle.

That’s impressive on its face, and part of Shell’s agenda here is clearly to make the case that its main product—gasoline—can still fuel an environmentally friendly vehicle.

But one comparison is all it takes to put Project M in a less flattering light. Because guess what else gets the equivalent of up to 100 miles to the gallon? The Tesla Model S.

(Of course, the Model S doesn’t actually burn gasoline, so the comparison relies on a measure known as Miles Per Gallon Equivalent, or MPGe. It’s an EPA standard saying that 1 gallon of gas is equivalent to 33.7 kilowatt hours of stored electrical energy. Basically, it allows a rough comparison of the overall energy efficiency of vehicles, regardless of their energy source.)

While they may be comparably efficient, the Model S and the Project M car aren’t even in the same ballpark as cars. The Model S seats five people, while the Project M seats 3, with what looks like fairly constrained headroom. The Model S notoriously goes from 0-60 in as little as 2.8 seconds—faster than some models of the McLaren supercar. The Project M’s time off the blocks is reportedly 15.8 seconds.

In short, Shell has achieved some undeniably admirable efficiencies by making major compromises on the performance and comfort that people want in cars that they’re willing to actually drive. Coming in the wake of the phenomenally successful rollout of Tesla’s new Model 3, Project M smacks of a symbolic rearguard action against a technology that’s just fundamentally superior.

For more on autos and energy, watch our video.

Of course, at least Shell is trying to defend its business model by offering real alternatives. It’s heartbreaking to have to dismiss what was obviously a lot of hard work by some very talented engineers, including some with backgrounds in Formula One. And the project is certainly more admirable than the approach taken by Volkswagen, Mitsubishi, and possibly Daimler and Peugeot, which was simply to lie about their cars’ fuel efficiency.

But in the end, good intentions or bad, it all points towards the same conclusion: unless we’re willing to squeeze into glorified golf carts, gas cars have gotten as efficient as they’re going to get.

Oil Glut Continues to Tank Prices

The world’s top oil companies are set to report their worst quarterly results yet in the current downturn but a recent recovery in crude prices is raising hopes the market has bottomed out.

An ever intensifying oil supply glut took global prices to a near 13-year low of $27.10 a barrel on Jan. 20, exacerbating pressure on oil producers already grappling with a more than 70 percent slide in prices since mid-2014.

“The 1Q16 reporting period looks set to be even worse than what we thought was already an especially ugly 4Q15,” said Jason Gammel, equity analyst at Jefferies.

For more on oil, watch:

Oil companies have slashed spending budgets by more than 25% since 2014, scrapped dozens of multi-billion dollar projects, slashed tens of thousands of jobs and reduced costs by at least 20% in the face of the price slump.

Some companies, such as Royal Dutch Shell RDS.A, might need to go further. Shell completed its $50 billion acquisition of BG Group in February, but might need to cut deeper in order to maintain its dividend and finance the deal.

Britain’s BP BP will be the first of the “oil majors” to report results on Tuesday. It recorded its worst-ever annual loss in 2015 while Shell posted its lowest annual income in over a decade, setting the scene for a poor start to 2016.

A stunning 60% rally in oil prices from their January low, however, has given strong tailwind to energy shares as investors are willing to look past the near-term pain.

“We’re seeing money flowing into the energy space and early money has gone into the lower-risk names among oil majors,” said Anish Kapadia, analyst at Tudor, Pickering, Holt and Co.

“There is still a lot of money sitting on the sidelines that will get into the sector once things get more bullish.”

The price/earnings ratio (PE) of oil majors, including U.S. heavyweights ExxonMobil XOM and Chevron CVX, has risen on a 12-month forward basis across the board since mid-February, suggesting investors expect stronger growth ahead.

They will be scrutinizing companies’ plans to return to growth after cutting so deep into future projects and production, said Kapadia.

“It is still a challenging sector. The oil price improvement will clearly help things, but if anything it highlights the problems of how companies have cut back on capex dramatically and are not investing in new projects,” Kapadia said.

Profits from refining and trading, or downstream business, which were a huge help in counterbalancing some of the oil production losses over the past 18 months, are also set to be weak in the first quarter.

BP’s global refining margin benchmark declined in the first quarter to $10.5 a barrel, from $15.26 a barrel a year earlier and $13.2 a barrel in the fourth quarter of 2015.

Brent prices averaged $35.2 a barrel in the first quarter, 36% lower than a year earlier.

Investors will also be seeking reassurance that dividend payments will be maintained, a key factor making Big Oil attractive. So far only Italy’s Eni and Spain’s Repsol have cut dividends in the current downturn.

BP struck a cautious tone on dividends this month, though, saying it aimed to maintain payments but could review the payout policy if oil prices remained lower for much longer.

Shell Is Closing Down Its U.S. Shale Unit

Oil major Royal Dutch Shell RDS.A is closing a business dedicated to so-called unconventional resources, a term used by the industry to describe shale reserves, and said on Wednesday the unit’s director and U.S. head Marvin Odum would leave.

Shell on Feb. 4 reported its lowest annual income in more than a decade and pledged further cost saving measures to deal with weak oil prices.

The Anglo-Dutch company said its shale resources unit would become part of the upstream business led by Andy Brown. Its Athabasca Oil Sands Project and Scotford Upgrader in Canada would fall under the downstream unit, headed by John Abbott.

Both Brown and Abbott are based in Europe, where Shell has headquarters and major offices in London and the Hague.

Odum, who joined Shell in 1982, will leave the company at the end of March and will be replaced as U.S. country chairman and president by Bruce Culpepper, executive vice president for human resources.

This Oil Giant Is Going to Slash Thousands of Jobs

Royal Dutch Shell expects to slash thousands more jobs to save costs if its takeover of BG Group goes through as planned early next year following a final green light from China.

The acquisition, which was announced on April 8 and is biggest in the sector in a decade, has been cleared by China’s Ministry of Commerce, Shell said on Monday, after earlier approvals from Australia, Brazil, and the European Union.

Shell RDS.A and BG LON: BGwill now send a merger prospectus to shareholders and hold special general meetings for votes on the deal. If approved, it will face a court hearing 10 days later and could be completed by early February.

Some shareholders, however, have voiced concern over the acquisition’s merits following the sharp slide in oil prices. The fall in Shell’s share price since April means the value of the deal has fallen to $53 billion from $70 billion.

Shortly after announcing the green light from China, Shell issued a statement saying it expected to cut about 2,800 roles globally from the combined group.

That would be nearly 3% of the group’s combined workforce of about 100,000, or equivalent to more than half BG’s roughly 5,000 employees.

The Anglo-Dutch oil and gas company had already outlined steps to protect dividend payouts and cashflow following the merger, which include cost savings of $3.5 billion and $30 billion in asset disposals.

The new job cuts are in addition to previously announced plans to reduce Shell’s headcount and contractor positions by 7,500 worldwide.

A BG spokesman said the company would remain focused on its business plan until the deal is completed.

Investor Concerns

The combination will transform Shell into the world’s top liquefied natural gas (LNG) trader and a major offshore oil producer focused on Brazil’s rapidly-developing sub-salt oil basin that would rival Exxon Mobil’s position as the world’s biggest international oil company.

Shell has nevertheless had to battle a sharp slide in oil prices, which have fallen from $55 a barrel in April to below $40 a barrel, which some investors said undermined the deal.

“The deal doesn’t make financial sense at the current oil price. You have got to be pretty bullish on the current oil price to make this deal work.” David Cumming, Head of Equities at Standard Life Investments, told BBC Radio on Monday.

Analysts at Credit Suisse, however, said the deal still made strategic sense.

“Yes, it is tough when one looks at spot oil prices … We are in the camp of ‘Yes’, not just because of the strategic rationale longer term, but also because of Shell’s CEO and chairman, who we think are the right people at the helm in this environment,” the bank said.

Last month, sources told Reuters that the Chinese Ministry of Commerce had pressed Shell to sweeten long-term LNG supply contracts as the world’s top energy consumer faces a large surfeit over the next five years.

The integration of the two companies has been planned by a joint committee in recent months but could encounter some difficulties as BG’s small and relatively nimble operations are merged with Shell’s much larger structure.

This company just wrote off more than Volkswagen

Europe’s biggest oil producer, Royal Dutch Shell RDSA, reported a hefty $8.2 billion charge Thursday, equivalent to around 5% of its market value, as it wrote off uneconomic projects in the Alaskan Arctic and Canada.

The Anglo-Dutch oil major’s third-quarter current cost of supplies earnings, the company’s definition of net income, came in at $1.8 billion, below analysts’ expectations of $2.74 billion and 70% lower than a year ago.

“In headline terms, this was a challenging quarter,” said Shell Chief Financial Officer Simon Henry in a video statement.

However, Shell said its bumper $70 billion deal to acquire smaller gas-focused rival BG Group Plc BGG remained on track for completion early next year, as it awaits regulatory approvals from China and Australia.

“The underlying performance does give us confidence to capture the significant value that is available in the BG combination and over time we will deliver that value back to shareholders,” Henry said.

Shell’s $8.2 billion charge included a $2.6 billion write-off due to its withdrawal from the Alaskan Arctic, as well as an additional $2 billion charge made on the Carmon Creek oil sands project in Canada, which the company suspended on Tuesday. It also reflected other impairment charges of $3.7 billion triggered by the downward revision of the long-term oil and gas price outlook.

Shell’s London-listed A shares were down 1.8% at 0725 ET.

Shell’s upstream oil and gas production division, swung to a loss for the first time in years. Its downstream refining and marketing division, however, benefited from weak prices to run refineries more profitably, with its net income up 46% at $2.6 billion.

“It’s a rather messy set of results, but it’s what I expected given some of the portfolio steps they have taken and it cleans up the balance sheet in advance of the BG merger,” said Jason Gammel, oil and gas equity analyst at Jefferies.

Italian rival ENI E also announced a huge hit from weak oil prices on Thursday, reporting a net loss in the latest quarter, while French group Total TOT fared better than expected and raised its production forecast.

Unlike some of its rivals, Shell made no further change to its $30 billion capital expenditure forecast for this year, which it cut earlier in the year from $35 billion.

More information on Shell’s strategy is expected at a management briefing next Tuesday.

Shell CEO: ‘Mixed signs’ on recovery of oil prices

Royal Dutch Shell CEO Ben van Beurden said at an oil industry conference in London that oil prices may become more expensive once more, although at a slow rate.

“I see the first mixed signs for recovery of oil prices,” said Ben van Beurden at the conference, according to Reuters.

“But with U.S. shale oil being more resilient than we originally thought and a lot of oil still in stock, it will take some more time to rebalance demand and supply,” he said.

His comments come as the price of a barrel of oil has tanked in recent months, going below $50 a barrel from over $100 last year. Earlier this year, meanwhile, Shell purchased BG Group for $70 billion in the largest energy deal in a decade.

Per Reuters:

Van Beurden said many U.S. oil producers would struggle to refinance while prices remained so low, leading to lower output in the future: “Producers are now looking for new cash to survive and they will probably struggle to get it.”